"Realism" doesn't mean "Just like real life", or anything else so clear cut. It's about consistency in-world.
Yeah. Pretty much that.
I don't see how realism is directly related to the limits (if any) of character power - if you're going by real life limitations, the first monster you meet would leave your character permanently maimed or dead-
If you're going by TES
lore limitations, then there really aren't that many I'm aware of...
The four friends of a war hero stole deific power from the heart of a dismembered super-powerful spirit, two of whom were later slain, as living gods, by the reincarnation of the war hero as a mortal whose adventures started as a penniless prisoner/agent in a little place called Seyda Neen. A mortal named Tiber Septim more or less made himself a god by his own hand. A Dunmer mage has been able to live for millennia and create clones as companions. The founder of the Empire started life as a slave and her uprising was aided by a demi-god hero.
Or is the argument that only NPCs should be allowed to be, for lack of a better word, awesome?
Anyway, I think realism should serve fantasy, and not the other way around; and it's best used to create convincing and sympathetic conflicts for and between characters, not to force us to play peasants or arbitrarily limit gameplay possibilities.