  We propose four channels through which government guarantees affect banks'
incentives to smooth income. Empirically, we exploit two complementary settings
that represent plausible exogenous changes in government guarantees: the
increase in implicit guarantees following the creation of the Eurozone and the
removal of explicit guarantees granted to the Landesbanken. We show that
increases (decreases) in government guarantees are associated with significant
decreases (increases) in banks' income smoothing. Taken together, our results
largely corroborate the predominance of a tail-risk channel, wherein government
guarantees reduce banks' tail risk, thereby reducing managers' incentives to
engage in income smoothing.
