"A bank has a million pounds. It lends all of it to me in exchange for a piece of paper called a loan agreement where I promise to pay it back plus interest. This piece of paper is a debt. As such a bank is allowed to call 8/9ths of it an asset. So it can lend out 8/9ths of a million pounds to someone else. They are compelled by international banking rules (BAsle II) to keep that ratio of 8/9th's intact. Guess what happens to the loan agreement (debt) for £900k... it is used to issue £720k of new loans. Which spawns £648k of new loans, which spawns.. you get the idea. Your £1m loan turns into a multi million pound lending frenzy. "
WWW that is not true I am afraid. Loans sit on a banks balance sheet as "assets" on the other side of the balance sheet they have to be funded by either deposits or wholesale funding. If a bank wants to make a loan it has to get the funding from somewhere. Problem in the UK is the banking system has a loan/deposit ratio of c140% i.e. we are overlent. The gap was made up by "wholesale" funding which is typically where the excess loans were chopped up in to debt securities such as ABS (asset backed securities) and sold to investors or the bank issues debt of its own to investors (i.e. pensions funds etc). The problem is now the wholesale funding markets are shut due to the economic mess we are in which means bank balance sheets need to shrink (i.e. get the 140% down to c100%). Bottom line is if a bank wants to make a loan it has to get the funding from somewhere. The magic mutlipier you imply does not actually exist. For every £ a banks lends it has to raise a £ in funding somewhere.
The Basle accord is about capital not funding. It determines how much capital a bank must hold to protect depositors against defaulting loans. Unfortunately UK banks are woefully short of capital.
More than happy to bore you silly over a beer as to the in and outs of how bank balance sheets work and how the UK stacks up vs banking systems around the world.