The role of cathepsin L in normal physiological processes was assessed using cathepsin L homozygous knockout mice (B6;129‐Ctsl^tm1Alpk). These mice were generated using gene targeting in embryonic stem cells. Null mice fail to express mRNA and protein to cathepsin L. They developed normally and were fertile. The distinct phenotypic change exhibited was a progressive hair loss, culminating in extensive alopecia by 9 months of age. Histological analysis of the skin from homozygous mice revealed diffuse epithelial hyperplasia, hypotrichosis, hair shaft fragmentation and utricle formation. These findings provide evidence that cathepsin L is involved in the regulation of epithelial cell proliferation and differentiation in the skin. In addition, the role of cathepsin L in bone remodelling was evaluated. Using bone histomorphometric measurements, trabecular, but not cortical, bone volume was found to be significantly decreased in the cathepsin L heterozygote and homozygote mice compared to the wild‐type mice. Following ovariectomy, it was observed that loss of trabecular bone, the most metabolically active component of bone, occurred to a lesser extent in homozygote, and heterozygote mice, than was seen in wild‐type mice. These observations suggest that cathepsin L is likely to have a role in controlling bone turnover during normal development and in pathological states.