Cystatin M/E (CST6) is a nonredundant, epithelium‐specific protease inhibitor with a presumed role in epidermal differentiation and tumor suppression. We have previously reported that cystatin M/E deficiency in Cst6^−/− mice causes neonatal lethality because of excessive transepidermal water loss. Biochemical evidence suggests that cystatin M/E controls the activity of legumain, cathepsin L, cathepsin V, and transglutaminase‐3. Using a genetic approach we sought to define the role of cystatin M/E in epithelial biology by identification of its target proteases and their downstream functions. Ablation of cathepsin L in a Cst6^−/− background (Cst6^−/− Ctsl^−/− double‐knockout mice) restored viability and resulted in normalization of stratum corneum morphology. Ablation of legumain or transglutaminase‐3 in Cst6^−/− mice, however, did not rescue the lethal phenotype. Intriguingly, both Cst6+ ∼Ctsl^−/− and Cst6^−/− Ctsl^+/− mice were viable, but the absence of cystatin M/E caused scarring alopecia in adult animals. In the cornea of Cst6^−/− Ctsl^+/− mice, we observed keratitis, hyperplasia, and transition to a cornified epithelium. Evidence is provided that activation of cathepsin D and transglutaminase‐1 are downstream events, dependent of cathepsin L activity. We conclude that a tightly regulated balance between cathepsin L and cystatin M/E is essential for tissue integrity in epidermis, hair follicles, and corneal epithelium.—Zeeuwen, P. L. J. M., van Vlijmen‐Willems, I. M. J. J., Cheng, T., Rodijk‐Olthuis, D., Hitomi, K., Hara‐Nishimura, I., John, S., Smyth, N., Reinheckel, T., Hendriks, W. J. A. J., Schalkwijk, J. The cystatin M/E‐cathepsin L balance is essential for tissue homeostasis in epidermis, hair follicles and cornea. FASEB J. 24, 3744–3755 (2010). www.fasebj.org