I like the idea of a levy though the rest of the recruitment system would have to altered somehow to fit round it. It would be nice if the levy represented a war resource that restricts constant wasteful war declarations. Lords would have to back off and let their towns recover if they want more recruits for the next war. The Light's Prosperity mod kind of approaches this. When you recuit troops they costs prosperity from the town and higher prosperity means high tier troops and higher quantity of troops, you can't return them to get prosperity back though.
I'd change the troop tier and recruiment system to represent the different social class and professional level of soldiers in fuedal armies as follows.
Levy - Levies can only be raised for war and are demobilised afterwards according to kingdom decree. You could pass a decree that forces levies to stay in service longer at the cost of settlment loyalty for example. These troops have their own tier list that can be upgraded but goes no higher than tier 3, are recruited at a tier appriopate to the level of training in the town and use weapons appropiate to their culture. They command pitiful wages, if any, and have fluctuating morale depending on decrees, leadership, state of events and settlement loyalty. Raising levies takes away prosperity which lowers tax income which can be brought back to normal by returning your levy alive not mention hurting your reputation if you keep getting everyones familes killed. Throughout a war some levies may offer to become regular troops by being upgraded into the relevent tree like bandits.
Men-At-Arms - These are troops you have right now in the game. They are your standing army who command good wages, have good morale and stick with you at all times. Recruitment should made more scarce to give a bit more room for the levies in the army but more should be done to make sure lords preserve these guys so that they can get levels and properly make up the highly skilled core of the army rather than be a pile of random units at random tiers.
Nobles - The nobility or otherwise the richest and most well equipped men in your army. Their recruitment could depend on your culture or decrees whether they work as elite soldiers for very high wages, are levied as their noble responsibility for war or give their services to the highest bidder or the most popular leader or all of the above. Typically to get these guys in any good number you need to own land as a vassal at the least.
For all this the prisoner system ought to be changed as well so all prisoners are ransomed directly to their employers and return to their homes when freed. This would help with retention of elite troops which otherwise dissappear as far as I know, maybe an alchemist turns them into the denars you ransom them for.