This paper studies how introducing a central bank digital currency (CBDC) can affect the banking system. We show that a CBDC need not reduce bank lending unless frictions and synergies bind deposits and lending. We estimate a dynamic banking model to quantify the role of these frictions in shaping the impact of a CBDC on the banking system. Our counterfactual analysis shows that a CBDC can replace a significant fraction of bank deposits, especially when it pays interest. However, a CBDC has a much smaller impact on bank lending because banks can replace a large fraction of lost deposits with wholesale funding. Substitution with wholesale funding makes banks’ funding costs more sensitive to changes in short-term rates, increasing their exposure to interest rate risk. We also show that a CBDC amplifies the impact of monetary policy shocks on bank lending.