Secretary of Treasury Janet Yellen said on Tuesday she urged Israeli Prime Minister Benjamin Netanyahu in a letter to take steps to bolster the Palestinian economy and warned the economic crisis in the occupied West Bank could have negative consequences for Israel.

Why it matters: The Biden administration has expressed concerns that a collapse of the Palestinian Authority will lead to chaos and violence in the West Bank and exacerbate the conflict in the region.

• The administration is also pushing for a "revitalized" Palestinian Authority to play a role in managing post-war Gaza.

State of play: The PA's financial crisis has worsened since the war in Gaza started due to several factors.

• At the beginning of the war, Israel placed restrictions on movement within the West Bank, revoked permits of Palestinians from the West Bank who work in Israel and withheld some tax revenues it collects for the Palestinian Authority — a major source of revenue for the PA.
• Israel has taken some limited steps in recent weeks aimed at preventing the collapse of the PA, including agreeing to transfer some tax revenues it was withholding from the Palestinian Authority to an escrow account in Norway.
• But concerns about the economy in the West Bank continue to mount.

What they're saying: "The United States has urged the Israeli government to release clearance revenue to the Palestinian Authority to fund basic services and to bolster the economy in the West Bank," Yellen said during a press conference in Brazil.

• The Biden administration's concerns were outlined in the letter Yellen sent on Sunday to Netanyahu, in which she emphasized the importance of "a secure and economically stable Israel to the U.S.," two sources familiar with the letter said.
• In the letter, she also stressed that Israel's economy and security will benefit from stability and economic vitality in the West Bank, the sources said.
• Yellen said she was pleased with an agreement between Israel and Norway on the Palestinian tax revenue issue. "Yellen highlighted the importance of paying civil servants in the West Bank as key to its stability," one of the sources said.

Yellen also noted the suspension of Israeli permits for the 150,000 Palestinian workers from the West Bank "has led to significant unemployment in the West Bank and has hurt the Israeli economy," a source said.

• She pointed to projections by Israel's Finance Ministry that estimated worker shortages at construction sites in Israel will cost the Israeli economy 3 billion shekels (more than $831 million), according to the source.
• Yellen also noted the economic impact of the restrictions to transportation, goods shipments, and movement of people within the West Bank. "She urged steps to remediate both issues," the sources said.
• The Israeli Prime Minister's Office did not respond to a request for comment.

Between the lines: Yellen didn't send the letter to her Israeli counterpart, ultranationalist Finance Minister Bezalel Smotrich, whom the Biden administration has boycotted over his rhetoric and actions.

• U.S. officials say Smotrich's actions against the Palestinian Authority in recent months have contributed to the economic crisis in the West Bank.
• After strong pressure from Smotrich, the Israeli security cabinet increased the amount of money Israel will deduct from the Palestinian Authority's tax revenues for the payments the PA transfers to families of prisoners by 21 million shekels (more than $5.8 million) in the coming year.
• Smotrich has defended his actions, claiming the Palestinian Authority supports terrorism. He's also said he won't allow any money collected by Israel for the PA to reach Gaza.

Zoom out: President Biden on NBC's "Late Night With Seth Meyers" show Monday night warned that Israel will lose support around the world if Netanyahu's government continues along its current path.

• "Israel has had the overwhelming support of the vast majority of nations. If it keeps this up with this incredibly conservative government they have, and Ben-Gvir and others…they're gonna lose support from around the world, and that is not in Israel's interest," Biden said, referring to Israel's ultranationalist National Security Minister Itamar Ben-Gvir.
• Biden said, however, "there is a path forward," which includes a hostage deal with a ceasefire during the month of Ramadan. "That gives us time to begin to move in directions that a lot of Arab countries are prepared to move in," he said. "For example, Saudi Arabia's ready to recognize Israel."
• He added that he is not talking about getting a two-state solution right away but about launching a process that leads there.