Ah well... if it's already so then it's okay. I thought the more units a lord has, the longer he didn't suffer any casualties (= no or a few battles, with only a few losses).
Whoever played "Medieval 2: Total War" knows, that you can't defeat another nation over the economy. Even if you siege all the cities they have simultaneously, cutting them off from all of their trade routes, their two or three 20-slot-armies full of knights and mercenary crossbowmen standing around will persist forever. If this would happen to the player, the enourmous upkeep would force him to disband those expensive armies. But as the AI doesn't pay wages at all, there is no way in driving a nation to declare itself bankrupt (and so defeated). I think this is a pity.
M&B has got the same problems, because the lords - as far as I know - don't have to pay wages either. So there is no way to at least weaken the enemy forces by burning villages, siegeing cities and robbing caravans.
This is why I want lords being dependant on the financial situation (as the player is, especially in this mod!).
And I think with enough money you can buy both: quality and quantity! So fighting battles should be ONE factor for army quality, but not the only one!
How about a simple system, where the units a lord leads are determined by the fiefs he owns? Villages raise the percentage (and more village raise the amount, of course) of bowmen/spearmen, towns offer militias (swordmen/crossbowmen/guisamers) and castles of course offer knights. Castles add only a few, villages more and towns by far the most units.
Example:
A lord with a village and two castles would have a lot of spearmen, archers and knights, while the knights would make up to 40% of his whole force! But as villages and castles don't offer a lot of recruits, he would have a unit cap of 120. So he would have 48 knights and 72 Peasants. His force is quite small, but strong.
Another lord owns two towns and nothing else. He would own only a few knights (5-10), but 240 militia units! His army would be huge, but suffer a lack of quality.
Of course those examples are exaggerated (48 knights!

), but I wanted to make clear how I imagine the system. In reality the impact on the army isn't that "absolute", of course (like 1 castle = 12 knights

).