Barclays is expected to name Bob Diamond, the investment banking executive whose enormous pay packet and unapologetic defence of the City's bonus culture have made him a controversial figure, as its new overall chief executive.

Diamond,59, who currently runs the highly profitable Barclays Capital investment banking arm, will be formally named today as the successor to John Varley, a source familiar with the decision said. Varley, who has been in the job for seven years, is expected to step down next year amid a wider shake-up of the bank's management team. A Barclays spokeswoman refused to comment.

In April Peter Mandelson called US-born Diamond the "unacceptable face" of banking for his estimated £60m-plus total pay package, complaining that the reward was hugely excessive for a role which involved "deal-making and shuffling paper around" and created real little economic value. Barclays dismissed as "total fiction" estimates of Diamond's pay.

When Varley took the top job in 2003, Diamond became the bank's president. While this was officially a subordinate role, Diamond's pay far outstripped that of the chief executive.

He has made a huge success of the investment banking activities and was long seen as the obvious successor should Varley decide to depart. However, his lack of experience in retail banking and long association with the more freewheeling, "casino capitalism" side of the business makes him a potentially contentious head of the UK's third biggest banking group.

The news is a surprise, given that Varley had offered no indications that he planned to step down.

Aside from his wage – which is around £250,000 a year before bonuses and share options are added – Diamond remains perhaps best known for pushing through Barclays' controversial acquisition of the brokerage arm of the US bank Lehman Brothers after its collapse in 2008 for the relative knock down price of $1.75bn.

In June, Diamond endured a tough time giving evidence at a federal court hearing in Manhattan looking into allegations that Barclays duped Lehman Brothers out of billions of dollars during the deal. After giving seemingly ambiguous answers to several questions, the judge told Diamond he was "coming across as evasive".

He takes the helm of the bank he joined in 1996 as it continues to emerge from the credit collapse chaos which engulfed the global banking industry.

Although Barclays' balance sheets were badly hit by toxic loans, the bank avoided having to seek any state assistance. Half-yearly profits, reported last month, were up 44% on the previous year, with virtually all the money earned by Diamond's Barclays Capital division.

Now a UK citizen, Diamond was born in Massachusetts as one of nine children of teacher parents. In 1979 he switched from academia to investment banking, working for Morgan Stanley and Credit Suisse before joining Barclays. A keen sports fan, he has previously presented the Barclays-sponsored Premiership trophy to his beloved Chelsea, and generally cuts a far more flamboyant and outgoing figure than the more traditional, public school-educated Varley.

Banking industry pundits had long speculated whether Barclays' heavy reliance on profits from Diamond's investment bankers made him the de facto group head anyway, although some doubted how much clout he wielded.

Diamond, estimated to be worth £95m personally, has vigorously defended City bonuses, saying in 2007 that he preferred to call them "incentive compensation".

He has also vocally opposed President Barack Obama's proposals to artificially limit the size of banks, saying this would hit world trade. He told the World Economic Forum in Davos in January: ""I have seen no evidence that suggests shrinking banks and making them smaller and more narrow is the issue."

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