It seems like this is going to be a weird part of the game until diplomatic capital actually has an inherent value. So, let's come up with a reasonable use for it. Let's give it enough utility so that a player would actually want to trade for it.
Here are a few suggestions:
1. Population boom: Everyone wants to migrate to countries with significant cultural and political power. Factions are ranked from most capital to least. Factions get a bonus to prestige for all cities, based on the rank.
2. You can buy something with it.
2a: To recruit heroes
2b: To build special buildings, embassy's etc
3. Monster density is effected by the rankings. The factions with the most capital, tend to be more civilized, and therefore have less roving brigands, etc.
4. Trade modifiers: Trading from inter-faction caravan routes gets a bonus based on capital rankings.