I also would find it hilarious if they did indeed do a level with the Banana Splits psychotic atmosphere in the background.
I dunno if they would so much need a level, just make it so that the trippy stuff appeared WHENEVER somebody did a Hyper Combo/Hyper Combo Finish!
However, there is one drawback to this idea.
In TatVSCap, almost everyone (if not all of the cast) is relatively well-known as serious characters. With the exception of the HB humanoid people (Centurions, Mightor, Birdman, the Kats, and potentially Dexter) everyone else would be basically a big collection of gag characters. TatVSCap attempts to be a somewhat serious crossover game, limiting the gag characters to a very small few. But having half the cast be gag people in a purportedly serious fighter would basically sell the image of another Clay Fighter 63⅓, which is NOT what we're trying to achieve here.
Well, that's also another thing to note. While TvC arguably focused more on the serious/hero characters, Tatsunoko itself is definitely full to the brim of various "silly characters". Hell, Yatterman, Doronjo and her crew and Hakushan are just a mere sampling of the kind of stuff that Tatsunoko has buttered their bread with in this light. There's a reason why Tatsunoko is sometimes referred to as the "Hanna Barbera of Japan"...
That said, I'd imagine that a "HBvC" could stand to do something similar. Balance out the roster with copious amounts of bad-ass (Swat Kats, Centurions, Young Hercules and Goliath, Race Bannon, etc.) and then could have some silly stuff too (Space Ghost, Blue Falcon and Dyno-Mutt, Atom Ant, QuickDraw/El Kabong, Snidely Whiplash and Muttley, Dexter's Lab, etc.).
But again, HB, like Tatsunoko, has plenty of "serious/heroes", as much as it has more silly stuff. The key would just be trying to find an adequate means of balancing it all for maximum enjoyment and fan-service.
Ryu possibly finding his ideal opponent in some one like Hong Kong Phooey? The possibilities would be ENDLESS!