Following recommendations by the Basel Accord, several banks use an Internal Rating Based (IRB) approach to assess the credit risk of their credit portfolios. This assessment is subsequently used to estimate regulatory capital reserves (CR) to cover themselves against unexpected potential losses. Using a sample of the United Kingdom’s Small and Medium-Sized Enterprises (SMEs), we report that an IRB approach leads to lower regulatory CR for SMEs than the standardised approach recommended by Basel regulations. However, an IRB method leads to overestimation of CR in comparison to CR estimates obtained using the Monte Carlo Simulation (MSC) technique. This difference in CR estimates obtained using IRB and MCS is attributed to the fact that MCS asset correlation is considerably lower than F-IRB asset correlation. Unlike Basel’s assumption, we find a positive relationship between SMEs default probability and asset correlation. This may imply higher CR when the actual correlation is lower than the one assumed by Basel Regulation.