It's one of the very few grey areas that are left in the LotR rules. Generally since you don't check for visibility of the model by seeing their wargear (like you won't see a model behind a tree if you only see their sword because it's assumed that they're hiding it) then people usually agree that equipment doesn't create a cover for in the way rolls, because otherwise you could have the following situation"
(=== stands for wall
..... stand for nothingness, but due to post formatting they need to be there
---- stands for the pike)
========................================
Pikeman ---------------
.............Another model
In this case you can't see the pikeman, therefore there is no logical reason to hit him, but his pike is blocking the line of sight to another model - if you allow the in the way roll then you're breaking the rules because you cannot possibly in any way be able to hit the pikeman as no part of the shot would ever go through his body, but at the same time it seems you should roll in the way because of the obscurity (but then again it is assumed that the pikeman has hidden his pike next to him...). Therefore for simplicity's sake all carried equipment gets ignored.
So the banner generally wouldn't count as being in the way (plus again look at it logically - will an arrow really be stopped by a piece of cloth?)
And as to your other question, if you do allow the banner in the way then it has to hit the model, it's not a piece of terrain, it doesn't work that way