Spending on Basel II IT compliance projects will total $4bn over the next two years, according to a report from analyst firm Datamonitor.

The report estimates the spending spree will amount to $1.93bn this year and top $2bn in 2005.

Although the deadline for compliance is 1 January 2006, banks will also have to show two years' worth of historical data.

Switzerland and Germany are in the lead on compliance, with the UK, France and Italy following them in terms of readiness for Basel II, which synchronises the way banks handle their capital assets across Europe.

Banks will have to make changes to the way they manage data and issue reports, which may lead to changes to databases and other systems.

But many financial companies are still in the process interpreting the regulations and working out their business impact.

"In terms of IT infrastructure, there will be a divergence between the leaders and those behind them over the next two years," said Cubillas Ding, senior financial technology analyst at Datamonitor.

Ding also stressed the widespread failure to recognise how Basel II projects could fit into the overall IT infrastructure to exploit common data and resources.

By exploiting the overlap between Basel II, best practice credit risk management and another upcoming regulatory change - International Accounting Standards (IAS) - the report suggests that banks could maximise efficiency and reduce the total cost of ownership.

"There are synergies between Basel II and IAS that can make the burden of compliance easier to manage effectively," said Ding. "Banks need to step back and look at the data infrastructure as a whole."

But enterprise resource planning companies are planning to bring out separate, targeted packages to manage each regulation.

"Cost-effective solutions are hard to come by at the moment," added Ding.

As well as pointing to a lack of maturity in integrated Basel II/IAS products, the report also claimed there is a lack of awareness at decision-making levels in banks and a reluctance to combine projects in line with regulatory deadlines.