The capital of your realm is the head of government. Its most important feature is that it is where all available soldiers from a realm will congregate. You will only be able to recruit troops in the capital.
The capital is also the seat of power. If there is a rebellion, whoever controls the capital of a realm will end up controlling that realm.
The ruler can only change the realm banner or rename the realm in the capital. Also, only the ruler can change the location of the capital.