Simple RPG style 2D sprites with a maximum of 50 frames wouldn't be so bad, but the SNK fighters where each character literally has at least 1,000 frames would be a nightmare to redo in HD so the graphics didn't look like ass.
Also, each sprite animation would likely need to be done by the same person/group, whereas many more people could work on a single texture.
Take Leon from RE4, for example: there were probably separate people working on his hair, face, clothes, and all of his animations. I'm not the best one to be guessing this, but I don't see how multiple people could work on the sprite animation of, say, Chun Li being knocked backwards without some inconsistencies arising.
Like I said, I'm REALLy guessing about the whole process now so if anyone knows what ACTUALLY happens, feel free to enlighten me.