I would still like to see diplomacy expanded as a concept, but at very least having what we have behaving in a logic and realistic way is already a big step forward.
This one-hundred percent over again, save the realism of course.
I've long believed that giving the player access to the diplomacy screen from the beginning would help with balancing out conflicts, allowing the user to determine which factions are at war and who is in jeopardy of losing. Granted access to this information alone wouldn't be enough to balance out the fighting but a user clan that wins losing battle could be rewarded above and beyond a typical mercenary, thus encouraging the user to act as something of a balancing force.
I've swung the balance of power more times than I can count, preserving and reclaiming the lands of Sturgia, Aserai and the Northern and Southern Empires. It's an effect tactic from dissuading the Khuzait spread, which really only matters to me because I like to conquer Sturgia and having the Empire around to keep them busy makes that easier.
Getting back on track the development of the diplomatic system would theoretically allow rivals to interfere with battles, preying on their enemies who are weakened after a field battle or castle siege. This is a tactic employed by users but I've never witnessed the AI utilize it. I'm not of the opinion that any of the factions need to be nerfed, rather the games AI and diplomacy need to be fleshed out, and the player needs more options for kingdom building apart from stealing idiots from other factions.
One last thing is snowballing really that bad? I find it adds a nice bit of urgency to a playthrough. Of course having it be the Khuzait so frequently is a problem. Repelling an evil empire and liberating allied lands sounds like some pretty compelling game play. Perhaps someday...