DECISION: [ADR-011] CECL Lifetime Loss via Soliton Forecast Horizons
DATE: 2026-02-18
TYPE: 1 (irreversible)
STATUS: Accepted
SOLITON SCORE: 0.75

## Context

CECL (Current Expected Credit Losses) requires lifetime loss estimation
with forecast horizons based on "current conditions and reasonable and
supportable forecasts." The standard does not specify fixed horizons —
institutions must justify their horizon choices.

Traditional approach: fixed horizon (e.g., 8 quarters) for all portfolios.
Problem: a strong economic signal justifies longer horizons, while weak
signals should shorten horizons with wider confidence bands.

## Options Considered

### Option A: Fixed forecast horizon (8 quarters)
Pros: Simple, common industry practice.
Cons: No sensitivity to signal quality. Overly confident in weak-signal
environments. Under-forecasts in strong-signal environments.

### Option B: Dynamic horizons via soliton stability (selected)
Pros: Horizon length adapts to causal signal strength. Strong solitons
(stable causal patterns) justify longer, tighter forecasts. Weak solitons
trigger shorter horizons with wider bands. Self-documenting reasoning.
Cons: Novel approach — regulators may require additional explanation.

### Option C: Expert-set horizons per segment
Pros: Human oversight.
Cons: Slow to update, not evidence-based, inconsistent across segments.

## Decision

Dynamic forecast horizons determined by soliton stability scores on key
causal paths (macro → borrower → default). Strong signal (>0.80) = 12
quarters; moderate (0.60-0.80) = 8 quarters; weak (<0.60) = 4 quarters.

## Rationale

The soliton score measures how stable and propagation-worthy a causal
pattern is through the DAG. This directly maps to forecast confidence:
a stable causal pattern (high soliton) means the mechanism is reliable
for longer extrapolation. This is more principled than fixed horizons.

## Consequences

**Easier:** Justified horizon choices, adaptive to economic regime changes.
**Harder:** Must explain soliton concept to regulators. Need sufficient
data to estimate soliton stability reliably.
