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mt_lut evaluates an expression on pixels. It basically allows implementing algorithms without having to write a DLL nor write assembly code. It uses a LUT table for optimization, but that doesn't work for 16-bit videos. Because noise reduction algorithms deal with subtleties and then affect the rest of the script, I'd recommend running it in 16-bit, and mt_lut then isn't a good option. If you need custom algorithms, creating a DLL is always a good option, like I did with FrameRateConverter to detect stripe patterns.
Banding is not related to blocking. Banding is due to rounding where each value appears as a distinct band. To avoid banding, we normally use dithering. No dithering leads to banding.
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