NOBODY REALLY WANTS TO BE BANKING CORRESPONDENT TO

C O N F I D E N T I A L TEL AVIV 002452

SIPDIS

NEA/IPA
TREASURY FOR GLASER, D.

E.O. 12958: DECL: 10/28/2018
TAGS: PREL KNNP KTFN EFIN IS
SUBJECT: NOBODY REALLY WANTS TO BE BANKING CORRESPONDENT TO
THE PALESTINIANS: RELATIONSHIP REMAINS IN THE BALANCE

REF: A. 10/22/08 AGOR-BURNETT HOLMSTROM ET. AL. E-MAIL

B. TEL AVIV 2144

C. TEL AVIV 2291

D. TEL AVIV 1508

E. TEL AVIV 1075

F. TEL AVIV 624

G. 07 TEL AVIV 3201

Classified By: DCM Luis G. Moreno for Reasons 1.4 (b) and (d)

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SUMMARY
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1.(C) Bank Hapoalim's Executive Vice President told Econoff
that the bank is firm in its decision to terminate its
correspondent relationship with the Palestinian commercial
banking sector on November 30. The bank has no interest in
maintaining its involvement in this unprofitable and risky
business. The only circumstance that may compel Hapoalim to
reverse or postpone its decision is the application of
regulatory or political pressure by the Bank of Israel (BOI).

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HAPOALIM DOES NOT WANT PALESTINIAN BUSINESS
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2.(C) Econoffs have received no information to indicate that
Hapoalim had decided or has been influenced to reverse or
postpone its decision. High level sources at Hapoalim,
however, have indicated that the decision to cut its ties
with Palestinian banks was a unilateral one made exclusively
by the bank as a result of a shareholders meeting in
September, and was in no way connected to any meetings which
may have occurred in Washington. Embassy Tel Aviv finds it
implausible that the BOI would be complicit in a meeting
intended to force its hand on the correspondent banking
issue. Bank Hapoalim's board decided to act in order to shed
a high-risk and low-return portfolio.

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NO CONNECTION BETWEEN THIS DECISION AND THE GLOBAL FINANCIAL
CRISIS
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3.(C) While the global financial crisis has had an effect on
the Israeli banking sector, Israeli banks do not seem to have
been hit hard (see reftel "B"). Contacts at Bank Hapoalim
and Bank Discount, the only two banks currently conducting
business and maintaining correspondent relationships with
Palestinian banks, have complained many times that their
Palestinian portfolio produces "little to no" profit and
comes with very sizeable risk. Hapoalim has even been named
in an American lawsuit brought by the Arab Bank accusing it
of being complicit in terrorist financing via their
correspondent relationship. Hapoalim stands to lose millions
of dollars in this suit and would like to curtail exposure to
any such risk of litigation in the future. While
Palestinian transactions may be valued in the billions, the
profits associated with processing these transactions are
small. Banking contacts say the drawbacks far outweigh the
benefits of doing business with the Palestinians and their
continued engagement in the Palestinian banking sector is
only the result of pressure by the BOI to maintain the status
quo while an alternate method of providing correspondent
services to the Palestinians is devised.

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GOI CANNOT INDEMNIFY PRIVATE ISRAELI BANKS
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4.(C) The GOI does not have the ability to indemnify
commercial Israeli banks against large risks and therefore
this has never been an option for resolving the problem.
"Comfort letters," defined as informal, non-binding
correspondence from the BOI expressing support for the
commercial banks' correspondent relationship, have never been
considered a tenable solution by Hapoalim or Discount (see
ref "A"). Banking and BOI contacts repeatedly state that the
only plausible solution at this time is to shift the
correspondent relationship to the quasi-governmental Israeli
Postal Bank. For the same reasons that the commercial
banking sector does not want the Palestinian business, the
Postal Bank is also staunchly opposed to accepting it. The
Postal Bank can be forced to accept the responsibility if the
GOI decides to take advantage of its legal authority to
compel it to do so. This would be a highly political move,
however, and BOI contacts suggest that the current political


turmoil would prevent such a measure from being adopted by
the Knesset. Whatever options may be on the table regarding
the Palestinian banking relationship, the PMA is not
considered a stakeholder by the GOI and its needs will not
affect the internal debates between the BOI and the Israeli
commercial banks (see ref "A").

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THE BOI STILL HAS TIME TO STEP IN AND FORCE HAPOALIM,S HAND
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5.(C) Econ contacts in the financial sector speculate
whether or not Hapoalim will actually carry out its decision
on Nov 30. Boaz Raday, Executive Vice President at Hapoalim,
readily admitted to econoff last week that the BOI has not
weighed in with the bank regarding the decision. Hapaolim
has threatened the move in the past, only to back down when
pressured by BOI regulators. When the BOI finally does turn
its attention to the matter, Hapoalim may find itself forced
to relent. It may, however, risk following through this
time. The outcome of this current game of chicken may put
Bank Discount, the only other bank currently doing business
with the Palestinians, in the precarious position of being
the sole Israeli bank maintaining its Palestinian ties. Bank
Discount, which in the past has followed Bank Hapoalim's lead
on this issue, has made no formal announcements regarding its
plans.

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