Interesting project Wombat...read through the posts, not the original setting so I'm unsure as to whether this is covered somewhere, but wouldn't there be a special division of the Watch who are dedicated to 'Kobold watch'..?
If the little blighters are living under the city, then they're gonna be causing trouble, even if they're actively attempting to avoid such (not that this is remotely likely if there's a Gnomish presence in the city!). They're Kobolds, it's what they do!
The governance looks highly feudal, but I've not seen mention of any clergy or faiths. This is problematic, since much of the direct populace control in any feudal system comes from religious/philosophical restrictions. Education needs covering too, is there a recognisable collegiate or do these people still use a mentor/apprentice approach to professional training (they're not mutually exclusive but often a society has a preference).