AMSTERDAM, Oct 7 (Reuters) - Economic recovery in the Netherlands is being held up by weak bank lending, while wrangling over austerity policies is creating undesirable political uncertainty, the central bank said on Monday.
The Netherlands is one of the few euro zone countries still in recession, although the central bank expects the economy to have returned to moderate growth in the third quarter.
In its semi-annual review of the stability of the Dutch financial sector, the bank also said non-performing loan volumes were still rising as a percentage of banks' total assets.
"There are signs that Dutch banks are restricting lending in an attempt to strengthen their balance sheets," the central bank said in the report, adding that strict credit policies could be lowering credit growth by 2 to 4 percentage points.
Dutch central bank president Klaas Knot said that while there are encouraging signs of a recovery and rebalancing, significant credit risks to the banks remain.
"The Dutch banking sector significantly strengthened its capital buffers in the past year," Knot told journalists on Monday.
"Step by step things are headed in the right direction, but we are not there yet and the weak economic recovery remains a risk to further strengthening of balance sheets."
The continued reluctance of banks to lend to businesses and households is bad news for the Dutch economy, which is expected to shrink by 1.25 percent this year.
The weakness of consumer demand is exacerbated by a property market crisis and deep government spending cuts designed to bring the budget deficit down below the European Union's 3 percent target, the bank said.
Political arguments over the spending cuts was the biggest single problem at the moment, Knot told journalists.
"The most important risk to the Dutch economy is the political situation. Let's hope that after eight quarters of longing for economic recovery, it is not going to be put at risk because there isn't enough political will to do what is necessary to keep our government finances manageable," he said.
"The 6 billion in cuts is not going to lead to improvement in the government finances in 2014. It will only lead to preventing a situation whereby the government deficit will increase in 2014," he added.
The number of non-performing problem loans in banks' portfolios is also rising, most notably at small and medium enterprises. Such loans as a percentage of total lending volumes have doubled since 2009 to more than 5 percent.
But large businesses have also been falling behind in their repayments, with businesses with exposure to the Netherlands' troubled property market the most exposed.
"Loans to developers and managers of commercial real estate count as risky," the central bank said.
The central bank also said Dutch financial institutions were vulnerable to growing online security threats.
The Dutch banking sector was badly hit by the global financial crisis in 2008, when the state was forced to buy lender ABN Amro back from troubled British bank RBS.
It was also forced to pay out nearly 40 billion euros to provide capital injections for banking and insurance group ING , insurer Aegon and financial group SNS Reaal, which was fully nationalised earlier this year after it was unable to resolve problems in its real estate portfolio.
Five years later the Dutch global banks are shadows of their former selves after numerous divestments and thousands of job cuts have left them largely focused on their domestic market and European backyard. (Reporting By Thomas Escritt and Anthony Deutsch; Editing by Hugh Lawson)