Diamond is fighting the pay row with rearguard political action

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ot be afraid. Stand firm and you will see the deliverance,” Investec analyst Ian Gordon wrote to investors before Barclays chief Bob Diamond unveiled a strong rise in profits yesterday.

Thus far, this year, Diamond is on course to deliver. Or, in Bob’s more prosaic American language: “Execute, execute, execute.”

Having set ambitious returns targets that he was forced to scale back last year, Diamond is hoping that events will now let him get on with carrying out his master plan – namely, to revamp or shut down any business generating returns under Barclays’ 11.5 per cent cost of capital, without taking too many losses in the process.

Only if he can deliver for shareholders will the row about who is paid what lose some of its venom.

The bank’s head start in Spain has served it well – unlike Deutsche Bank and Santander, it has so far recorded an improving loan book this year.

But as soon as you plug one hole on the sinking European continent, another opens up: the gains in Spain were offset by greater losses in Portugal and Italy.

And Diamond sounded far too optimistic when he called the end of last year “an outlier”. A bank credit crunch was only forestalled by a €1 trillion cash injection by the European Central Bank, which is not an action it can repeat indefinitely.

But aside from the resurging Eurozone crisis, Diamond’s task is being made harder due to obsessive fiddling by UK regulators.

The bank’s capital reserves rose to 10.9 per cent of its risk-weighted assets this quarter – above what the market has been assuming will be a ten per cent minimum required by the FSA.

That is because banks can no longer rely on the public assertions made by the Bank of England and FSA on what the capital rules will be. Instead, they are shuffling frantically in time to the mood music, which only ever gets tougher and tougher.

The degree to which this fussing has infuriated Diamond is underlined by his rearguard action. He told analysts today that Barclays has “offered itself as a test case” to international regulators in coming up with a recovery and resolution plan – a way to wind up a huge bank without a taxpayer bailout.

“The eradication of ‘too-big-to-fail’ problem is a critical initiative,” Diamond said forcefully.

This is no arcane intellectual interest. It is vital political ammunition that Diamond is keen to deploy against any argument that an “implicit subsidy” justifies more and more government interference.

And when the Eurozone crisis flares up again, it could also be an urgent practical matter for regulators as weak banks start to tumble.

So the only way Diamond can deliver for shareholders is if he can both weather the returning debt storm and prove that his bank can stand or fall alone, without any government holding its hand.