It's very reasonable for the employer to not want you to format your computer.
From the employer's standpoint, lots of employees inadvertently leave some piece of company information sitting on their machine when they leave that the employer will subsequently need. Developers may have versions of documentation that never got saved off to a network drive or code branches they were playing with that never got checked back in or random spreadsheets with information that someone will need in a week or a month or a year. A lot of places will either leave departing machines with the employee's manager for a while or copy the hard drive before re-imaging it just in case someone needs something off of it in the future.
Realize that this approach has benefits for you in addition to the employer. If in a week someone says "Hey, didn't Steve have an updated version of this doc? I could have sworn this is old", they can go to your machine and check. If there is a more recent version that you happened to forget to save off to the network drive, all is good. If all your files are there but there isn't a new version, people generally assume they were mistaken about there being a new version. If you wiped your machine on the way out the door, someone is liable to think that you carelessly (or worse, intentionally) deleted information they needed.
While employers generally understand that employees will make incidental personal use of company equipment, that should generally be incidental. So there shouldn't be much personal information on there to begin with. And what information is there is generally easy enough to remove. And even if you leave something behind, the employer isn't likely to go looking for personal information (particularly where they have tons of your information in their own systems already) so it's relatively safe. For the employer, the risk that you're going to destroy some document that they need is much, much greater than the risk that you're going to leave some piece of personal information that they later trip across.
Beyond that, it's likely that if you did reinstall Windows, the company would just have to redo it. Most reasonably sized organizations have a relatively standardized process for taking a returned laptop and refreshing it for the next person. Often that involves re-imaging from a "golden" install that has Windows, the default set of applications, etc.