Banks has impressed in 11 appearances for the Under-23s this season, scoring four times.
He joins the second-placed Pars as they continue their push for promotion from the Scottish Championship.
The 19-year-old attacking midfielder signed for Palace from Dundee United in January 2020 and spent a short time on loan with Alloa Athletic before the curtailment of the 2019/20 Scottish Championship.
He will stay at East End Park for the remainder of the 2020/21 season.
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