Which scenario constitutes a conflict of interest for a bank acting as trustee?

The scenario where a bank acts as a trustee for two trusts that transact with each other clearly illustrates a conflict of interest. This situation can arise when the bank is responsible for managing assets in two separate trusts that may have competing interests or conflicting goals. For example, one trust could be poised to benefit from a transaction that negatively impacts the other trust. The trustee has a fiduciary duty to act in the best interest of the beneficiaries of both trusts, and any transaction between these two trusts can jeopardize that duty.

The potential for favoritism or biased decision-making in favor of one trust over the other introduces a significant ethical dilemma. This conflict is particularly pronounced since the bank, as trustee, must navigate the interests of each trust while maintaining impartiality and loyalty to all beneficiaries involved.

In contrast, the other scenarios presented do not present the same level of inherent conflict. A bank loaning to a trust without investment responsibility, lending to a purchaser unrelated to the trust, or making a loan to the trust's settlor may present their challenges, but they do not create a direct conflict of interest as seen in the scenario involving two transacting trusts.