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LONDON, July 21 (Reuters) - Banking shares rose after Mario Draghi singled them out as an indicator to gauge the European Central Bank's transmission of monetary policy, adding that a state-funded public backstop may be part of the solution to manage bad loans in the system.
Shares of several leading European banks have slumped to multi-year lows on the back of deteriorating profits, worries over loans gone sour and sluggish lending growth.
Deutsche Bank shares hit a record low in the aftermath of Britain's vote to leave the European Union while rising bad loans at Italian banks have weighed on the sector.
Deutsche Bank shares, which opened flat, rose 3 percent following Draghi's comments. The FTSE Italian All Shares Banks index rose nearly 2 percent.
The broader euro zone banking index rose 1.7 percent.
Draghi's comments also led to the euro giving up its earlier gains, as he flagged risks in the banking sector. (Reporting by Sudip Kar-Gupta; Editing by Vikram Subhedar)