I like your system for D&D. If I was ever running a level-based game, there's a good chance I would do it that way, as long as I could get buy-in from the players.

Part of the problem with old-school Elric is that so much of character creation is random (including race and class, if I remember), so you have such a wide-range of competency to begin with that it's hard to ever achieve any sort of balance. But I am a big fan of the "use it if you want to improve it" model. If you ever get a chance to read Burning Wheel (http://www.burningwheel.com), it has a highly developed and effective version of this mechanic.