According to Harvard professor Kenneth Rogoff, the global banking sector has been showing signs of turbulence for quite a while. This bubble has burst, almost bringing down the entire financial system. The former chief IMF economist argues that the current crisis arose because banks have bet on loose long-term lending conditions.

Rogoff estimated that the banking sector should have suffered turmoil even before the fall of Silicon Valley Bank (SVB) in March. The ultra-low interest rates that the market had enjoyed for several years simply delayed the inevitable. 

Silicon Valley Bank invested heavily in bonds that they deemed to be held to maturity. What is more, SVB had one of the highest shares of uninsured deposits. However, those bonds tumbled in value when the US Federal Reserve hiked rates. So, the bank had to sell those bonds before the maturity date. Meanwhile, SVB clients, fearing for the safety of their deposits, began to withdraw funds en masse.

Kenneth Rogoff believes that any investment strategy that involves illiquid assets can lead to serious losses. “I didn't know it would be in the US banking sector. I was thinking, I don't know, maybe Japan, Italy, which might still be yet to come. But it's a worldwide phenomenon,” he summoned. With the global tightening cycle ongoing, financial institutions have to adapt to new economic conditions, the economist stressed.