Multi-rate adaptive filters have numerous advantages such as low computational load, fast convergence and parallelism in the adaptation. Drawbacks when using multi-rate processing are mainly related to aliasing and reconstruction effects. These effects can be minimized by introducing appropriate problem formulation and employing sophisticated optimization techniques. In this paper, we propose a formulation for the design of filter bank which controls the distortion level for each frequency component directly and minimizes the inband aliasing and the residual aliasing between different subbands. The advantage of this problem formulation is that the distortion level can be weighted for each frequency depending on the particular practical application. A new iterative algorithm is proposed to optimize simultaneously over both the analysis and the synthesis filter banks. This algorithm is shown to have a unique solution for each iteration. For a fixed distortion level, the proposed algorithm yields a significant reduction in both the inband aliasing and the residual aliasing levels compared to existing methods applied to the numerical examples.