The securities lending market is a core short-term funding market that not only provides critical liquidity to the financial markets but also facilitates collateral upgrading from low-grade securities to high-quality safe assets. Using a unique data set for European government bond loans, we find that during crises, borrowing costs increase more for high-quality liquid bonds issued by core countries compared to bonds from peripheral countries due to flight to quality. Borrowers are more likely to use non-cash collateral and pay high fees to upgrade collateral in stressed market conditions. We provide evidence showing the link between borrowing in the securities lending market and financing in the repo market. In addition, purchase of peripheral country bonds by the European Central Bank stimulates borrowing of these low-grade bonds, implying that the securities lending market serves as a channel to transmit monetary policy.