The current banking crisis is a 'worldwide phenomenon' that started long before SVB failed, Harvard professor and former IMF economist says

• Chaos in the banking sector was a long time coming, according to a former IMF chief economist.
• The crisis was, in part, caused by banks betting on a prolonged period of ultra-low rates, Kenneth Rogoff said.

Turmoil in the banking sector was set to occur long before Silicon Valley Bank (SVB) failed earlier this month, said Kenneth Rogoff, former chief economist at the International Monetary Fund.

Rogoff, a leading scholar of financial crises, said chaos ensued after a number of years of ultra-low interest rates.

In the case of SVB, the bank had a substantial proportion of deposits invested in securities that it initially had planned to hold to maturity, along with a large number of uninsured deposits.

But when rates when up, the bond values fell. And after SVB was forced to sell those bonds at a steep loss before maturity, customers panicked about the safety of their deposits and withdrew funds en masse, causing a run on the bank.

"What happened is Silicon Valley Bank is maybe a little extreme in its naivete, but almost any kind of investment strategy that had illiquid assets — longer term assets — is going to lose money like this," Rogoff, an economics professor at Harvard University, told Yahoo Finance Live on Thursday.

"I didn't know it would [start] in the US banking sector," he said, adding that issues could've taken place in Japan or Italy before SVB was seized by regulators. "It's a worldwide phenomenon."

Since the global financial crisis over a decade ago until last year, banks have been managing risk and investing under loose monetary policy, which was "a good moneymaker for a long time," Rogoff added.

Now that the Fed and other central banks are raising rates, institutions have to adapt to drastically different economic conditions to service their customers, he explained.