Shares of New York Community Bancorp (NYCB) experienced another significant drop on Tuesday, plummeting by 22%. The sell-off continued since the lender reported an unexpected quarterly loss last week, putting the stock on track to lose over half of its current value.

The sudden surge in selling pressure has not only impacted NYCB but also dragged down shares of its peers. This has reignited fears about the overall health of the banking industry, which has been grappling with concerns about its exposure to the troubled commercial real estate (CRE) sector.

NYCB had set aside larger-than-anticipated provisions for potential bad loans, primarily due to its exposure to CRE. Several borrowers in this sector are at risk due to high interest rates and low occupancies. Commenting on the situation, Russell Hackmann, founder of Hackmann Wealth Partners, mentioned that there is growing evidence suggesting a grim outlook for office real estate.

The concerns surrounding CRE have also prompted U.S. Treasury Secretary Janet Yellen to acknowledge the issue. Yellen stated that the Financial Stability Oversight Council, which comprises multiple regulators, is currently focusing on addressing these concerns.

This ongoing sell-off has taken a toll on the KBW Regional Banking index, which dropped around 1.4% on Tuesday. Analysts have pointed out that the issues faced by NYCB are specific to its balance sheet and should not be generalized to the entire banking sector.

NYCB's assets exceeded $100 billion after its acquisition of Signature Bank last year, subjecting the lender to stricter regulatory requirements. In response to this, NYCB decided to cut its dividend to bolster its capital reserves. The bank had reportedly faced mounting pressure from the Office of the Comptroller of the Currency, a major banking regulator.

Since reporting its earnings, NYCB's market value has plunged to approximately $3.5 billion, significantly lower than its peak value of nearly $10 billion in August. As a result, at least 13 brokerages have downgraded or reduced their price targets for NYCB's stock. Additionally, credit rating agency Fitch downgraded the bank's credit rating due to increased regulatory requirements, which will limit NYCB's flexibility in building capital.

In a further blow to NYCB, the bank has now been hit with a proposed class-action lawsuit filed by shareholders. The lawsuit alleges that NYCB concealed the deterioration in its loan portfolio. The complaint was recently filed in Brooklyn federal court.

The decline in NYCB's stock has triggered a surge in options trading activity. NYCB options were reportedly trading at 11 times their usual volume, with an overwhelming number of bearish put contracts outnumbering bullish call contracts by nearly 5-to-1. The bank's 30-day implied volatility, indicating the expected swing in NYCB's shares, reached its highest in at least four years.

The broader Regional Banking exchange-traded fund also experienced increased options activity, although at a more moderate level. These developments suggest that investors are primarily focused on NYCB's prospects rather than the broader regional banking sector. The 30-day implied volatility for the ETF has slightly decreased from its three-month high reached on Wednesday.

The sharp decline in NYCB's stock has significantly benefited short sellers, who have reportedly made around $159 million in paper profits since the bank's earnings report, according to data from Ortex.

As NYCB continues to grapple with the fallout from its unexpected quarterly loss, investors and industry observers will closely monitor the bank's steps to address its CRE exposure and rebuild investor confidence.