Exactly.
One is a level five city, the other is a castle (different levels).
There are only three of them on the map, one for each faction - and they are uber important. All the top-level units are hired inside the castle and all the major economic and other upgrades are built inside its adjacent huge_city.
So losing the capital equates to basically losing the game. You'll probably be able to hold on to the end, but fulfilling victory conditions will become impossible.
The only real "problem" is the fact that stand-alone huge cities can't be built, or at least they look real ugly and out of place without the castle. The game becomes of necessity less "free" because the center of your kingdom is determined in advance.
But in our mod, which aims to be historically accurate (as much as can be with out sacrificing too much game-play) this isn't a problem.
Where the concept could fit (Minas Tirith
), I'd really like to see it used.