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.