I think a Nolan-directed movie taking place primarily within Arkham would be extremely interesting--if not for the fact that there is simply no rogues gallery to occupy it. For starters, many of Arkham's traditional inmates are not appropriate for the current film universe. Equally important, though, is that to include those villains that do make sense in this world--like the Riddler--it would have to be implied that all these new super criminals rose up and were captured by Batman since TDK. I think that would be problematic; it would feel like the film had skipped over a multitude of important stories in order to set up this premise that Arkham is full of Batman villains.
Accordingly, I think the only way for an Arkham Asylum film to work is as the first film in a new iteration of the franchise--one that starts not at the beginning of Batman's career, but at it's peak, and uses the most pure, recognizable versions of the characters so that the audience can walk into the film without asking "When did Batman meet the Riddler and Poison Ivy?" and so on.
As an aside: with regards to Nolan's Arkham facility not being big enough or interesting enough for an entire film, well, that wouldn't be the case if "Gotham Knights" is considered in-continuity, since the Narrows island is shown as having become one massive extension of Arkham, housing all those whose minds were lost in the fear toxin incident.