BTW, i agree the conversation spam near npc's needs work. It should really blur together, with maybe the odd snippet breaking through.
On topic, banter is mostly so conversations aren't just information dispensaries. At the moment, i can effectively walk up to a stranger and get into a in-depth conversation about Syria without anyone batting a eyelid. Realistically, you'd sidle up to someone who didn't look too busy, say "Hi, odd question i know but where did you get those shoes? I love them!", natter for a minute and
then you explain you've been in a coma and would quite like to know about current affairs.
In other words, you need a system for small talk, buttering people up and putting them down. When spirits get low around the campfire, you don't talk about the righteousness of your mission, you tell a joke.
So you'd have a friendliness system which determines how willing people are to talk to you, socializing which can affect mood and perception of the player, etc.
"Right, now I'll stop travelling and indulge in banter" seems odd and being stopped by the system to look at some abstracted banter would be annoying.
Now that you mention it, fast travel could do with being a sight less vague. It would be annoying to force a discussion about the local gossip, so instead you could set your conversation preferences during fast travel, bounce it off your companions own preferences and have the result summarized at the end of the journey. You would only be pulled out of fast travel for a conversation if it suddenly got weighty or key information was divulged. You could also be informed of individuals mood (or the parties for large groups), so morale and leadership become an ongoing concern.
Right now we can catch fleeting extracts of conversation around town and half pay attention to our companions as they argue which all seems natural (if somewhat limited in content). Throwing in an extracted description in amongst that noise would be distracting. So how would you see it working?
Lastly, the idea is that people discussing something actually important will stand out rather then the opposite. Throw a stick at the moment and it will land by 6 people hyperventilating over how terrifying someone is.