Axios revealed that the administration of US President Joe Biden expressed its deep concern that the Israeli finance minister will cut Palestinian banks from the Israeli financial system next month and cause an economic collapse in the occupied West Bank, according to what two US officials told the website.

A collapse of the Palestinian banking system could lead to the collapse of the Palestinian Authority, creating a power vacuum that could throw the West Bank into chaos and exacerbate conflict in the region.

Israeli Finance Minister Bezalel Smotrich, an anti-Palestinian extremist settler, has taken numerous steps over the past two years to weaken the Palestinian Authority as part of his West Bank annexation ideology.

"In the past, Smotrich has described the Palestinian Authority as a threat to Israel and said that supporting Hamas is a good thing because it divides the Palestinians and reduces the chances of establishing a Palestinian state," according to the website.

Smotrich's positions as finance minister and defense minister responsible for civilian affairs in the West Bank give him significant influence over Israeli government policy toward Palestinians in the occupied territories.

Smotrich has the authority to authorize Israeli banks to conduct financial transactions with Palestinian banks without the risk of being accused of money laundering and financing terrorism. Without this approval, Palestinian banks will be cut off from the Israeli financial system and will collapse.

In June, Smotrich threatened not to extend the mandate for Israeli banks working with Palestinian banks.

The threat allowed him to pressure Israeli Prime Minister Benjamin Netanyahu to approve the construction of thousands of new housing units in Jewish settlements in the occupied West Bank and to legalize five illegal outposts.

In return, Smotrich extended the bank's mandate for four months, instead of one year as his predecessors did.

The banking correspondence authorization expires on October 31, and the United States and many of its allies are concerned that Smotrich will not extend it, US officials told the site.

An official from one of the G7 countries said that the United States expressed its concerns about Smotrich and the Palestinian banks during a meeting held in recent weeks with treasury and finance officials from G7 governments.

The G7 official said the United States had warned that if Palestinian banks were cut off from Israeli banks, it could significantly destabilize the West Bank and create a violent escalation that would spill over into Israel.

The G7 official said the West Bank would turn into a "cash economy" that could benefit terrorist organizations that largely use cash to operate.

The official added that if the Palestinian Authority's security forces were further weakened, they would not be able to fight terrorism.

The G7 official said that the collapse of the banking system would be devastating to the entire Palestinian society and would reduce the ability of Palestinian civilians to access food and basic services.

A US official said that the Biden administration and its G7 allies expressed their concerns to the Israeli government in the weeks following the meeting and stressed the risks of such a situation to Israel's security.

The G7 official said the United States and other G7 countries do not engage directly with Smotrich because of his extremist views. The United States has considered imposing sanctions on Smotrich over his destabilizing actions in the West Bank.

The message was instead conveyed to Israeli Foreign Minister Israel Katz, Strategic Affairs Minister Ron Dermer and Netanyahu himself, a source said.

What to watch: Two sources said that ahead of the October deadline, Smotrich set technical conditions centered on a third-party review of the Palestinian banking system as a condition for renewing the license for one year.

But the Biden administration and its G7 allies are concerned that when the deadline approaches and Smotrich’s conditions are met, he will make “new demands that will have nothing to do with banking and have a lot to do with expanding settlements” in the West Bank, the official said.

"Our goal is to make clear that such behavior not only endangers stability in the West Bank, but also endangers Israel's security," the official said.