LONDON ― In November, the United Kingdom’s Financial Conduct Authority announced a settlement in which six banks would be fined a total of $4.3 billion for manipulating the foreign-exchange market. And yet share prices barely reacted. Why?

The nefarious practices and management failings uncovered during the yearlong investigation that led to the fines were shocking. Semiliterate email and chat-room exchanges among venal traders revealed brazen conspiracies to rig the afternoon exchange-rate “fix” for profit and personal gain. Senior managers were so disengaged that they allowed their employees to act like vulgar, overpaid children. Using nicknames like “the three musketeers” and “the A-team,” they did whatever they liked, at an enormous cost to their institutions.

But, despite the huge FCA fine, no top executive was forced to fall on his or her sword, and investors did little more than shrug. One reason, of course, is that the settlement was known to be coming; only the details of the offenses and the scale of the fines were news.

The more important reason, though, is that even $4.3 billion is small change when compared to the total fines and litigation costs incurred by the major banks over the last five years. Morgan Stanley analysts estimate that the top 22 banks in the United States and Europe have been forced to pay $230 billion since 2009 ― more than 50 times the cost of the FCA settlement. This is over and above the heavy losses that banks incurred from bad lending and overambitious financial engineering.

American banks have incurred more than half of these massive penalties. The European bill amounts to just over $100 billion ― roughly half of which was paid by the top seven British banks.

But the numbers tell only part of the story. In the U.S., the penalties have been dominated by fines for sales of misleadingly marketed mortgage-backed securities, often to the two government supported entities Fannie Mae and Freddie Mac. The banks, it would be fair to say, do not wholly accept regulators’ arguments about that, but they have bitten their tongues and paid up. (U.S. regulators have also imposed high penalties on foreign banks for breaches of American sanctions policies in relation to Iran.)

In the U.K., by contrast, the biggest penalties have come in the form of compensation payments made to individual mortgage borrowers who were sold Payment Protection Insurance. The regulators maintain that much of this insurance was worthless to borrowers and was mis-sold. The banks believe that some of the claimants whom they are being forced to pay are unworthy, but they have nonetheless coughed up the money. That unhappy episode has cost British banks $37 billion so far, with more to come ― most likely another $5 billion or so.

The Morgan Stanley analysis suggests that we can expect another $70 billion in fines and litigation costs over the next two years from already identified errors and omissions. And new episodes could emerge; two years ago, no one anticipated the fallout from the manipulation of the foreign-exchange markets.

The irony here ― not lost on the major banks’ finance directors ― is that as fast as banks add capital from rights issues and retained earnings to meet the demands of prudential regulators, the funds are drained away by conduct regulators. The scale of the penalties is now large enough to have a substantial impact on banks’ balance sheets, delay the restoration of their health, and constrain their lending capacity.

Some of the money, especially in the U.K., has gone back to individual customers. But more has gone to the regulators themselves and onward to national governments. In the U.K., fines once helped defray the regulator’s costs: bad actors reduced the fees charged to the good ones, creating a positive feedback loop. Today, the payments have become so large that the government has seized them and channeled revenues exceeding the regulator’s enforcement costs to veterans’ charities.

In the U.S., the end recipients are less clear; indeed, they are undisclosed. Charles Calomiris of Columbia University has challenged what he calls “a real subversion of the fiscal process” as funds are raised and spent in non-transparent ways.

The most important question, however, is whether fines on this scale serve as useful deterrents. Clearly, the post-crisis period has revealed unacceptable behavior in many institutions. It will be some time before we know whether large fines on corporations, paid principally by their shareholders, contribute to keeping the system honest. But that seems unlikely when banks and investors seem punch-drunk, barely reacting to regulators’ blows. The reputational impact of each new settlement is modest, despite the escalation in the level of fines imposed.

The FCA has just announced a review of its pricing policies. “This is not a penalties race,” according to Georgina Philippou, the authority’s enforcement strategy director. Whether the current approach serves as an effective deterrent is a question that should be widely debated. Senior bank managers and regulators have a common interest in developing a more effective system ― one that punishes the guilty and creates the right incentives for the future.

By Howard Davies

Howard Davies, former chairman of Britain’s Financial Services Authority, deputy governor of the Bank of England and director of the London School of Economics, is a professor at Sciences Po in Paris. ― Ed.