Finance, Forex and Investments

Commercial banks borrowing from Federal Reserve?

I have a question on my macroeconomics homework that for some reason is confusing me. Commercial bank borrowing from the Federal Reserve... a) is not permitted because of the Federal Reserve Act b) is permitted but only for banks that are bankrupt. c) decreases the excess reserves of commercial banks and their ability to offer credit d) increases the excess reserves of commercial banks and their ability to offer credit It's C isn't it? Since the loans made from the Federal Reserve would be considered a liability to the commercial bank?

Public Comments

1. It is a liability, but so what? When I make a deposit in a bank, from the bank's perspective it is a liability, but it still increases the bank's ability to offer credit to others. They take X% of what I deposit, put it in their Fed account, and then are free to lend out the rest. Why should it be any different if the money comes from the Fed? http://en.wikipedia.org/wiki/Discount_window (In fact, money borrowed from the Fed appears in the bank's account at the Fed so there is no need for a separate step to add part of the liability to the reserves.)