Reuters Regional U.S. bank stocks sank on Wednesday, dragged by a 38 plunge in the shares of New York Community Bancorp after it cut its dividend and posted a surprise loss, renewing fears over the health of similar lenders.

The KBW Regional Banking Index closed down 6, its biggest oneday drop since March 13 last year after New York39;s Signature Bank collapsed amid depositor panic sparked by the failure days earlier of Silicon Valley Bank.

Deposits have since stabilized, but some investors said Wednesday39;s selloff highlighted ongoing concerns over regional lenders39; health, including that the cost of retaining deposits would squeeze net interest income NII which drives lending profits.

The sector in general is subject to more of an emotional trade simply because depositors can be spooked into feeling like the collapse is imminent. But higher interest rates have been wearing on earnings and NII for a lot of these banks, said Brian Mulberry, client portfolio manager at Zacks Investment Management.

The selloff seemed to catch the market by surprise.

Traders in options backed by SPDR SP regional bank exchange traded fund had been positioned with a bullish bias, especially for the near term, Trade Alert data showed.

On Wednesday, those options traded at four times their usual pace as investors positioned for a more gloomy outlook. Put options, typically bought to express a bearish or defensive view, outnumbered calls, generally a bullish play, 3to1.

Many traders…