Israel is facing a preventable security problem of its own making. Roughly NIS 17 billion ($5.5 billion) in Israeli banknotes sit trapped inside Palestinian bank vaults across the West Bank. That money cannot be lent, invested or used to pay Israeli suppliers. It is effectively frozen outside the financial system.

During my time as United States ambassador to Israel, I heard Israelis and Palestinians describe this same problem from opposite sides of the table. The Palestinians spoke of vaults overflowing with shekel notes they could not move, lend or spend. The Israelis spoke of legal and compliance risks. Both were right. And both were describing a situation that, left unresolved, makes Israel less safe.

Under the 1994 Paris Protocol, the Palestinian economy was built around the Israeli shekel. Palestinians use it every day – they earn it, spend it, and save it. But because it is Israel’s currency, Palestinian banks cannot simply return excess cash to the Bank of Israel on their own. Instead, they can return physical shekels only through two Israeli banks – Bank Hapoalim and Israel Discount Bank – which operate under a Finance Ministry indemnity waiver.

For years, this system worked tolerably. The waiver was renewed annually. Cash flowed back. Trade continued. When the banking channel works, Israeli businesses get paid on time, Palestinian firms can import and grow, and both governments collect tax revenue.

But the system has now broken down – and the consequences cascade across both sides of the Green Line. The repatriation cap (the amount the Bank of Israel will allow to be deposited) – currently around NIS 4.5 billion per quarter – covers barely half of what is needed. The result is a growing mountain of unusable cash and a banking sector being slowly strangled.

To put it plainly: you cannot wire physical banknotes, invest vault cash, use it to pay an Israeli supplier’s invoice, or to fund a mortgage, or extend credit to a small business. The shekels are not merely idle; their........

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