The European Council on Foreign Relations publishes a paper recommending the EU take measures against financial institutions that do businesses in the West Bank. Israeli bank stocks dip shortly after Israeli media quoted a Reuters article on the report.

The degree of nervousness in Israel over potential future sanctions against local companies that do business in the settlements was evident for all to see Tuesday. Publicity surrounding an EU think tank report on the topic caused the Tel Aviv banking index to drop 2.3 points in less than an hour (a total of 2.46 points for the day).

The report, published by the European Council on Foreign Relations, included a series of recommendations intended to create a distinction between formal EU-Israeli ties and those that create complicity in its settlement activities in the West Bank. It put a special emphasis on the banking system. (Read the full report below.)

According to the reports’ authors, Hugh Lovatt and Mattia Toaldo, “differentiating between Israel and its settlement activities within the EU’s bilateral relations is one of most powerful tools at the EU’s disposal for challenging the incentive structure that underpins Israeli support for the status quo.”

The report recommends the European Commission “task its directorates general with reviewing their existing interactions with Israel to assess whether differentiate between Israel proper and the settlements.” A special emphasis is placed on the banking system, which conducts financial activities in the settlements — mostly mortgages and loans — but also has many interests in Europe.

The ECFR has no formal capacity within EU institutions, but the alarm bells in Israel rang nonetheless. A Reuters piece on the report was picked up by the local media and published by Ynet at 1:03 p.m. Shortly thereafter, the Tel Aviv Stock Exchange’s banking index took a dive. The Israeli media was quick to connect the drop to the news items on the report.

The three major Israeli banks — Hapoalim, Leumi and Discount — lost 2.6-2.7 percent each. They also had led the day in trade volume.

Sources in the banks dismissed the report, stating that it carries no formal weight. The Israeli Foreign Ministry declined to comment on the matter for the same reason. The market, however, sent a different signal. And while the stocks may rise again tomorrow, the unexpected drop revealed how worried the Israeli business community is about international measures against the occupation, especially those connected with the financial system.

However, a source in the banking system told the financial daily Globes that this could turn out to be the greatest threat to the Israeli banks — even more than the reform the government intends to implement.