I skimmed this, but this goes over getting banned from Xbox Live, the network service, not a system that prevents you from using the console

It also covers your ability to use the console itself. It seems reasonably fair.

tl;dr The banned account can still play games in offline mode but can't re-download them since this is done through the XBox Live service. Other users of that XBox can do everything as normal including play and re-download games that were installed by the banned account.