Treasury Secretary Janet Yellen is keeping a close eye on the debt ceiling negotiations, but she’s also worried about the banking sector. After a May 18 meeting between Yellen and the CEOs of the largest U.S. banks, a Treasury spokesperson released a statement that reaffirmed the strength and soundness of the U.S. banking system. However, Yellen also told those CEOs that more bank mergers may be necessary.

Straight Arrow News contributor Larry Lindsey explains how, with all the losses sitting on banks’ balance sheets, industry consolidation will not be the silver bullet.

Treasury Secretary Janet Yellen was meeting with a group of some of the nation’s leading bankers and told them that it’s likely that America is going to have more bank consolidation, by which she means mergers and takeovers such as what we saw, for example, for First Republic Bank recently.

Well, she’s got a lot of data supporting her. Just the week before, the Federal Reserve released a study that showed that there were 722 banks that had unrealized losses of more than 50% of their capital. Now, you might remember that that was how Silicon Valley Bank got into trouble. It had losses on its long-term Treasury portfolio that was destroying its capital; the depositors found out and they began to run.

So having more than half of your capital eaten up by prospective losses is a big number. Worse, 31 banks had net losses sitting on their balance sheet of more than all of their capital. In other words, if you counted those losses, they would be underwater. Thirty-one banks.

But it gets worse. If you look at the industry as a whole, those losses, those unrealized losses account for 30% of total bank capital in the country. Wow, that kind of sounds like if you’re gonna have consolidation, it’s a lot like rearranging the deck chairs on the Titanic, don’t you think? I mean, there just isn’t enough capital to go around, at some point, if we recognize those losses.