During an interview in Paris this week, Treasury Secretary Janet Yellen said that an increase in interest rates and recent banking instability are likely to prompt more banks to pursue mergers this year, while adding that the rising costs of retaining depositors are contributing to this trend.

According to Yellen, several smaller banks noted that they are paying more on savings accounts after the Federal Reserve began raising rates quickly last year. That trend has continued following the collapses of Silicon Valley Bank and Signature Bank (OTC:SBNY) in March, reported the Wall Street Journal.

During the interview, Yellen said that paying higher rates for deposits is now denting those banks' profitability.

Many banks are facing challenges due to the Federal Reserve's rate increases. Concerns over their sustainability led to significant drops in the stocks of midsize banks earlier this year.

The Financial Stability Oversight Council, the panel of regulators led by Yellen, met last week to discuss the banking sector, focusing on risks banks face in lending for commercial real estate. Yellen said those risks primarily lie in the loans smaller banks have extended for office buildings.

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While higher interest rates have increased the cost of many commercial mortgages, Yellen said she doesn't expect office-building loan defaults to cause broad fallout, though it could cause other banks to fail, the Wall Street Journal reported.

"There may be some problems from this, but I think it's going to be manageable," Yellen said, according to the publication. "I don't really think that this is systemic."

According to the Wall Street Journal, Yellen said she doesn't expect a return to the same instability seen earlier in the year but believes that weaker second-quarter earnings could pressure stock prices and lead some banks to merge.

"I don't think it's a huge threat to the sector, but there will probably be banks that end up wanting to merge," Yellen said.

According to her, more consolidation in the banking industry could be healthy, though Yellen has warned against the biggest banks becoming even bigger.

Yellen is in Paris this week to discuss with global leaders the debt burdens faced by developing nations, especially those grappling with climate-related disasters.

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