Final answer:
A conflict of interest in banking occurs when a bank has competing interests, such as when it is both a lender and a trustee, which could interfere with impartial decision-making. Scenarios include a bank loaning to a trust it manages, or to the settlor of a revocable trust it manages, both of which could be conflicts. The bank must carefully balance its duties to avoid favoritism and maintain trust.
Step-by-step explanation:
A conflict of interest occurs when an entity has competing interests or loyalties that can potentially interfere with the ability to make impartial decisions. In the context of financial institutions like banks, such conflicts can arise when dealing with loans and trusts. Specifically, a conflict of interest may occur in the following scenarios:
- When the bank loans funds to a trust of which it is trustee with no investment responsibility, there is an inherent conflict because the bank may not act solely in the best interest of the trust beneficiaries.
- When the bank loans funds to the purchaser of trust property from another non-affiliated bank, this typically does not represent a direct conflict of interest since the bank is not serving dual roles.
- If the bank is trustee of two trusts which do business with each other, it may have divided loyalties and this could represent a conflict of interest as the bank must act in the best interest of both trusts, which can be challenging if their interests are competing.
- When the bank loans funds to the settlor of a revocable trust for which the bank is trustee, this is a conflict of interest because the bank could favor the interests of the settlor over the interests of the trust beneficiaries.
These scenarios highlight the delicate balance required for banks to manage their roles as trustees and lenders while maintaining fairness and avoiding conflicts of interest.