Indeed, Basel III will have some potential transitional costs that arise as banks, on average, need to increase their capital base in order to fulfil the new requirements. While the basic assumptions on the M-M theorem may hold in the long term, financial markets are characterised by information asymmetries and frictions in the short run, which can be especially prevalent in distressed periods.
BIS central bankers’ speeches  7  Banks have several possibilities to adjust their capital ratios. For instance, they can raise capital, increase lending spreads, reduce dividends and/or downsize (risk-weighted) assets. In practice, it is likely that banks’ adjustment is going to be achieved through a combination of all these measures.