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) -------------- SUMMARY -------------- 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). -------------- HAPOALIM DOES NOT WANT PALESTINIAN BUSINESS -------------- 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. -------------- -------------- NO CONNECTION BETWEEN THIS DECISION AND THE GLOBAL FINANCIAL CRISIS -------------- -------------- 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. -------------- GOI CANNOT INDEMNIFY PRIVATE ISRAELI BANKS -------------- 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"). -------------- -------------- THE BOI STILL HAS TIME TO STEP IN AND FORCE HAPOALIM,S HAND -------------- -------------- 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. ********************************************* ******************** Visit Embassy Tel Aviv's Classified Website: http://www.state.sgov.gov/p/nea/telaviv You can also access this site through the State Department's Classified SIPRNET website. ********************************************* ******************** CUNNINGHAM