WRAPUP 1-Bernanke says Fed may extend Wall Street lending

*Bernanke says Fed may extend primary dealer credit facility *Stocks rise, bonds ease, dollar gains *Bernanke says may need investment bank oversight laws *Fed's Lacker urges rate hikes to curb inflation

By Patrick Rucker

ARLINGTON, Va., July 8 (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday the U.S. central bank may keep an emergency lending facility for big Wall Street firms open longer than it initially intended, a signal the Fed is fearful of shutting down a vital backstop.

Credit costs have been driven higher and U.S. economic growth also has been hurt by market turmoil, Bernanke said at a forum sponsored by the Federal Deposit Insurance Corp.

"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets," Bernanke said.

Bernanke's remarks calmed financial markets, which had been rattled this week by the possibility that government-sponsored mortgage finance providers Fannie Mae and Freddie Mac would have to raise substantial new capital. Stocks rose, U.S. Treasury securities eased and the dollar posted gains.

"The last thing he wants to do is walk away and see a dealer collapse," said Anton Schutz, portfolio manager at Mendon Capital Advisors in Rochester, New York. "Panic in the market is not over. It's all about safety and soundness."

STILL UNDER STRAIN

The Fed set up the so-called Primary Dealer Credit Facility, or PDCF, in March as part of its actions to facilitate the purchase of ailing investment bank Bear Stearns by JPMorgan Chase & Co (JPM.N). It said at the time the PDCF would continue for at least six months.

The lending program allows primary dealers -- the biggest firms that deal directly with the Fed -- to borrow directly from the Fed at the discount rate, currently 2.25 percent.

The Fed's action came after weeks of turbulence in financial markets had raised fears a credit crisis stemming from rising mortgage defaults was spiraling out of control.

Borrowing at the primary dealer facility averaged as high as $38 billion a day in March and early April, but eased to $1.7 billion a day in the week ended July 2.

Bernanke said, though, that markets were still strained.

One indicator of banks' willingness to lend to one another, the gap between the three-month London interbank offered rate (Libor) and three-month overnight index swaps, was at its widest in over two months on Tuesday.

Bernanke said the Fed, working with other regulators at home and abroad, "has redoubled its efforts to strengthen the capital positions, liquidity reserves, and risk-management practices" of financial institutions it supervises.

On Monday, the Fed and the Securities and Exchange Commission reached an agreement on sharing information about banks but Bernanke noted that was to deal with immediate conditions.