* European Commission plans proposals in first quarter of

2027

* Easing capital and liquidity requirements could release

230 billion euros of liquid assets, report says

* National interventions prevent banks from building scale,

report says

By Philip Blenkinsop and Jan Strupczewski

BRUSSELS, July 17 (Reuters) - The European Commission aims

to limit political interference in European Union banking

mergers and remove obstacles to cross-border banking within the

bloc to allow EU banks to compete more effectively against

larger U.S. rivals.

An EU executive report released on Friday says internal

barriers are preventing EU banks from expanding, leaving them at

a disadvantage to U.S. lenders that have benefited from

economies of scale in a more integrated U.S. market. EU mergers

remain largely within national borders.

"This leads to an outcome where many banking groups in the

EU are large relative to the size of their home economy, but not

relative to the size of the EU or the banking union economy or

international competitors," the report said.

Unjustified national interventions in cross-border bank

mergers were preventing banks from acquiring scale at the EU

level to reach a critical size, it said.

The criticism comes after Germany rejected in June an offer from

Italy's UniCredit to take over Commerzbank.

UniCredit began its pursuit of Commerzbank back in September

2024, but has faced strong opposition - highlighting how hard it

is to pull off cross-border banking deals in Europe.

While Germany officially cited the price offered by the

Italian bank as the reason for its rejection, the government has

also made clear that Commerzbank is a key lender to German

companies and should remain under German ownership.

"It is a mistake from our point of view. If it's okay by the

supervisor and the competition authority, cross-border mergers

are good things," a senior EU official said, adding that U.S.

banks were outcompeting European peers across many business

lines in Europe.

"The main driver of competitiveness is not the rulebook ...

it's the absence of scale," the official said.

The EU executive, the report said, will propose a range of

measures in the first quarter of 2027.

These include plans to crack down on EU members that breach

EU rules limiting the circumstances under which they can

intervene in proposed mergers.

Other proposals would allow cross-border banking groups to

meet capital and liquidity requirements more at the parent

level, rather than the current system with additional

requirements for subsidiaries. Removing such constraints could

release €230 billion ($263.1 billion) of liquid assets, the

report said.

It will also replace its proposal from a decade ago to

create a European deposit insurance scheme with a new plan to

simply deposit insurance measures in the bloc.

The banking industry gave the report a mixed reception.

French banking lobby FBF described the report as containing

"several positive orientations" but said concrete measures on

key issues were required, including better regulatory

coordination and limits on country-specific rules.

Christian Sewing, Deutsche Bank CEO and president of the

Association of German Banks, urged swift action, calling for

adjustments to the lower limit on capital requirements known as

the output floor, relief for trade finance and improvements on

software investments, as well as urging a review of financial

stability buffers.

($1 = 0.8742 euros)