If I understand correctly, when you have 2 lore decks for a faction, you're allowed to take either and then exchange any 5 cards keeping any type of card at max 2 instances.

That feels a little bit restrictive.

What is the reason why we cannot just build a deck of 20 cards from ALL available lore cards, while still having 2 card restrain? Have anybody tried that and faced any significant imbalances?

Of course, let's say both armies have all packs. I can see how this gives an advantage to an army mustered from 1 pack against an army, mustered from 2.

I think they didn't want to go too heavy on deckbuilding with the idea of scaring players. I don't see any reasons why you shouldn't play with a complete customization of the Lore deck, so, go for that

This has come up before here and on BGG. We don't care for the implementation either and have been using our own custom rule. For each faction, we take both lore decks, pull out all duplicates, and shuffle them together. I believe this leaves you with a 24 card lore deck. Also, if we draw a lore card we can't use (Crushing Blow and you have no Rune Golems, etc.) we discard it and draw again. If you muster any neutral units, their cards get shuffled in too.

Yes, it leaves you with only 1 copy of each card and the deck is slightly larger, but we like the reduction in setup time (we think setup is already involved/interesting enough) and the greater variety of useful cards we see.