(Bloomberg) -- US Treasury Secretary Janet Yellen criticized Israel for saying it will hold back revenues collected on behalf of the Palestinian Authority, and warned it against cutting Palestinian lenders off from their Israeli correspondent banks.

The moves “threaten economic stability in the West Bank,” Yellen told reporters ahead of a meeting of Group of Seven finance ministers and central bank governors. 

The correspondent banks are “are critical for processing transactions that enable almost $8 billion a year in imports from Israel, including electricity, water, fuel, and food, as well as facilitating almost $2 billion a year in exports on which Palestinian livelihoods depend,” she said.

Yellen’s statement came after remarks by Israeli Finance Minister Bezalel Smotrich in which he called on Prime Minister Benjamin Netanyahu to impose “harsh punitive measures” against the PA, which governs Palestinians in the West Bank.

Smotrich and other members of Netanyahu’s coalition are pushing for more punitive measures against the PA as Israel’s war against Hamas in Gaza continues. They say the PA is hostile to Israel and cite its refusal to condemn Hamas’s Oct. 7 attack on southern Israeli communities.

Read: Bank of Israel Warns Lenders Still Face Risk Stemming From War

The economies in the Palestinian territories of the West Bank and Gaza are shekel-based and need Israeli banks to make business transactions. Two Israeli lenders, Bank Hapoalim B.M. and Israel Discount Bank, act as correspondent banks for this purpose and as part of the Oslo accords, Israel is obligated to enable this financial channel.

The Israeli lenders have been asked to be relieved of this arrangement for over a decade because they’re legally exposed if the Palestinian banks don’t abide by international restrictions meant to prevent funding for terrorist organizations and money laundering.

Yellen said she expects other countries to also express concern about the impact of such a decision on the West Bank economy — “I think this would have a very adverse effect also on Israel,” she said.

“We will try to do all that we can diplomatically to ensure that this arrangement continues,” she added.

Hamas, which nominally rules Gaza, is designated a terrorist organization by the US and European Union.

Read: Israel Recalls Ireland, Norway, Spain Envoys Over Palestine

The Israeli government gives its banks immunity from criminal prosecution in Israel and promises to compensate them for any civil lawsuits.

The compensation agreement expired in March and was extended until June. If the pact is not renewed — and Smotrich says he isn’t in favor of a renewal — the Israeli banks will pull out of the whole arrangement.

--With assistance from Alessandra Migliaccio and Craig Stirling.

(Updates with Yellen comment in eighth paragraph. An earlier version corrected country spelling in headline.)

©2024 Bloomberg L.P.