The global recession will eradicate $40 billion (£29 billion) of spending by banks in the years to 2012, affecting the UK worst of all, according to analyst house Datamonitor.

Banks remain in “survival mode”, implementing strict cost controls that are badly hurting IT investment, Datamonitor said in its report ‘The Impact of Financial Crisis on Technology Spending in Banking’.

The UK will be the worst affected of all markets, experiencing a worrying seven percent drop in investment, Datamonitor said. And the predicted cut in spending in the represents a two percent decline globally on last year.

Banks would continue to focus on shoring up capital, the analyst house said, making cost containment the “order of the day”.

But the year would not be entirely bad news, Datamonitor insisted. While cost reduction would increase, efforts by banks to drive their operational efficiency and to deliver results from mergers would mean some vital investment was necessary.

As banks reduce staff numbers in their customer branches, they will look to technology to maintain service levels, Datamonitor predicted, with IT investment growing in functions such as account administration and loans processing.

In central offices, technology investment for risk management and compliance will remain level, Datamonitor said, but it warned that banks may try to get more from existing systems where possible.

Daniel Mayo, director of analysis at Datamonitor, said the recession would cause “a major structural shift in banking”, predicting that “banks will need to adjust their operating cost bases accordingly”. He also warned that “internal IT departments will likely bear a significant brunt of IT spend reduction pain.