What happens when banks lend their excess reserves?

When banks lend their excess reserves, they create new money through the process of fractional reserve banking. This lending increases the money supply in the economy, as borrowers deposit the funds they receive, allowing banks to lend out a portion of those deposits again. This cycle can stimulate economic activity by providing businesses and consumers with access to credit. However, excessive lending can also lead to inflation and increased risk of defaults if borrowers cannot repay their loans.