If usecustombannedimage is on, this is the actual image that will replace banned images (after necessary size stretching). Having this be a 1x1 transparent image (as it is by default), will result in banned images simply "disappearing". You will see blank areas on webpages, but in most cases you won't get any other hint that an image is missing.
In most cases these options need never be changed. Because their names include 'custom', there may be a misimpression this isn't already a fully adequate image replacement scheme (which it is).