I think it is a little exagerated to think that Nolan takes the remaining characters as "watered down versions of the Joker", because he took almost every A-list villain onto his films. Scarecrow, Ra's al Ghul, The Joker, Two-Face, Bane, Catwoman, Talia al Ghul, and also taking in count Victor Zsaz, Carmine Falcone, Salvatore Maroni.
We know now that the studio was pushing for The Riddler, which I think it is the wrong choice with upping up the game in the third film. And not necessarily because it would be too similar to the Joker, but because the modus operandi, with his mind games (which I think they are completely different from the Joker in motivation) of the character would make the film feel like another episode of the franchise, hence similar to The Dark Knight. It could have been awesome, but not necessarily progression and culmination, which is what Nolan aimed at first.
Who is left? Besides the Riddler, we have Mr. Freeze, Clayface, Poison Ivy, Man-Bat who are to Sci-Fi for this world, though I would have loved to see Nolan's interpretation of Mr. Freeze. Killer Croc can't sustain a movie on his own, and though not impossible to make, it would have been tricky. The Penguin would have fit into this world, but to make it work it would have been retreading into the gangsters of the previous films. The Ventriloquist and Scarface, who are a personal favorite of mine, would get stuck in the same way as the Penguin. Mad Hatter wouldn't fit the bill either, falling into the same territory as Riddler. Harley Quinn well, if the Joker was not returning, there is no reason to have her.
I don't like Black Mask, but then again, we would be back with the mob. Other characters like We have left then with Hugo Strange, Deadshot and Bane, from which Bane is the only one who can offer a physical challenge with plausible characteristics, and he fits the bill of an "ending" villian of sorts.
We have to take into account that Chris Nolan, while being a fan of the character, isn't well versed in the Batman comics.
I recently aquired "The Art and Making of The Dark Knight Trilogy", and in the chapter where there are developing Batman Begins, David Goyer is the man Chris Nolan chooses for developing the story, and Nolan was fascinated by the story. Nolan states that, for Begins, they didn't want to do any of the other villians already made on the previous films. I'll transcribe an excerpt.
They were determined, as well, to feature villains that would be new to Batman movie audiences, and felt strongly that they should avoid using any of the villains that have been seen in previous films. Already introducing audience members to a different kind of Batman, they didn't want to confuse them further with a reinvention of the Joker or Penguin.
It was a tough standard to meet, however, as most of the high profile villains in Batman's rogue gallery had already seen screen time "Chris and I had a long discussion about the various rogues that were left", recalled Goyer, "and I knew them all. He asked me: 'Okay, who's left?' Who can we use?' So I told him, 'Well, there's the Calendar Man.' ''What does he do?' 'He kills people based on holiday themes.' Chris said 'No way. Who else?' 'Well, there's the Mad Hatter.' Gone. 'There is Killer Croc, this half-human, half-crocodile that lives in the sewers' Gone. 'There is Clay Face, the human mud heap' That wasn't going to work either."
"And then I told him that among the villains that hadn't been seen in features yet was one of my favorites - Ra's al Ghul. Chris asked 'Who is Ra's al Ghul?' And I said, 'Funny you should ask', because we'd been talking about coming up with a villain who was older and could function as Bruce's mentor, and then go bad and be the villain. Ra's was perfect for that because, in the comics, he is older and has a paternalistic quality."
Also, funny thing. Nolan at first disliked that the Scarecrow had to wear a mask. He needed a sense of functionality, and Goyer fought tooth and nails to get Scarecrow his mask, and made it a gas mask that protected him from the fear toxin.
From what I have seen, story has come up first in the process of making the films, and a sense of progression with what have been done. I can see that for the third film, Nolan wanted first and foremost, make and ending for Bruce's journey, and there are few villains with the reputation and characteristics that can offer something new that could serve for a finale, instead of a more episodic approach.