While I usually let sleeping dogs lie, this is one bad bone I still haven't been able to digest ever since its introduction...
I wouldn't mind a few more titular titles to spice things up, it's a shame that stuff like the kingdom of Naples was made impossible to form. There's a few good candidates, for example:
- Switzerland
- Kingdom of Naples
- Terra Mariana
About holding multiple kingdoms: It might be interesting if one was able to form unions after holding both titles for long enough. Say instead of fantasy "Empire of Scandinavia" then holding 3 or more kingdoms Nordic for over 100 years allows you to form "The Nordic Union/commonwealth" - or maybe even allowing you to name the entity yourself. You would be emperor-level but not emperor by title, and thus allowed to have king vassals.
You could make the same rule with duchies; if you hold more than 3 duchies for over 100 years and you're independent/vassal of an emperor you may be recognized as "grand duke of [invent entity name]" thus allowing you to have duke vassals (staying true to the game mechanics) without inventing kingdoms (which some would argue would break immersion somewhat)
While the two of them are interesting ideas, I still am against this for the very same reason I was and still am against the added empires, a reason you stated actually:
"...thus allowed to have king vassals."
Just... no. The only western state to have really ever done this is the HRE, hence its special status and fourth tier. I can't see any reason for this other than Gamey ones, people who don't want to bother with handling the matters of holding several crowns, and those... well, I simply can't acknowledge them as legitimate (while I do know it is a game and made for enjoyment this in my opinion makes the game less fun and breaks my groove even more than the ahistorical-and-ridiculous-by-choice Aztecs). I know this is just going off topic and ripping up an old wound, but I just can't sit idly without commenting on it.
So no, I wouldn't want King-of-King titles, since the only one to have ever done so is the HRE. Why? Possibly because any legitimate King worthy of his crown and name would want to keep the Prestige and Grace granted to him by controlling several kingdoms rather than dealing them to vassals, no matter how Modest he is. Besides which the Bohemia thing wasn't a Kingdom being given to a vassal but a vassal being promoted to a King, which while not much on paper is a whole lot in actuality. And Great Britain, Spain and Poland-Lithuania were all three Kingdoms following the unification rather than Empires. They were Kings and Queens, not Emperors and Empresses.
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Now, on to the topic at hand: No, I wouldn't want to see a Tier 3 Switzerland formable, for the reasons that have already been stated by others more knowledgeable than me.