Hibernate provides two levels of caching: a session-level cache (L1) and a session factory-level cache (L2). The L1 cache is enabled by default and caches objects retrieved and saved during a session. The L2 cache caches objects across sessions and can improve performance by reducing database load. It is configurable and can be clustered. Hibernate also supports a query cache that caches query results, but it requires careful configuration to avoid issues from invalidated data.