In the aftermath of the Global Financial Crisis, both micro- and macro-prudential regulation
are at work, but they are based on ”ad-hoc” rules. This paper proposes an alternative
micro-founded optimal prudential rule. Our unique prudential regulation progressively
conducts all banks to an optimal asset level, thus avoiding the ”too big to fail” paradigm.
For a given critical asset level up to which the PA can successfully constrain banks, the
optimal asset level is shown to be equal to half this critical value. Our optimal policy
rule depends on banks' size. The PA should hence constrain large banks to progressively
reduce their assets level and conversely encourage small banks to progressively
increase it. A simultaneous regulation of banks on different loan markets, which accounts
for correlation risk, accelerates the speed of convergence toward bank system
equilibrium whatever the initial level of the asset. This micro-founded mechanism can
be easily implemented in Dynamic Stochastic General Equilibrium (DSGE) models designed
for prudential policy analysis.