What happens when a bank has excess reserves?

When a bank has excess reserves, it means that it holds more reserves than the minimum required by the Federal Reserve. This situation usually allows the bank to earn interest on those excess reserves at the federal funds rate. The federal funds rate is the interest rate at which banks lend reserves to each other overnight. By holding excess reserves, banks can take advantage of this rate to earn a return on funds that are not immediately needed for lending.

This scenario also opens up the potential for banks to lend more to consumers and businesses, but there is no immediate requirement for them to do so. Excess reserves provide banks with flexibility in managing their liquidity and funding needs while also enabling them to generate interest income. Therefore, a bank with excess reserves is likely to benefit from the interest on the federal funds rate, making this choice the correct answer.