Does banding still exist in Magic and how does it work with combat damage assignment?

Banding is a legacy keyword ability that technically still exists in the Comprehensive Rules (CR 702.22), though WotC has not printed new cards with it since the early days of Magic. Cards like Benalish Hero and Timber Wolves still have the ability, and it remains fully functional under the rules.

The core mechanic works in two parts. First, during the declare attackers or declare blockers step, creatures with banding can form a 'band' — attacking creatures with banding (or one creature with banding plus any number without) may attack together as a unit, and similarly for blocking (CR 702.22b, 702.22c). All creatures in a band are considered to be attacking or blocking the same creature together.

The crucial advantage of banding is in combat damage assignment. Normally, the attacking player assigns damage from a blocked attacker, and the defending player assigns damage from blockers. With banding, the controller of the banded creatures gets to assign all combat damage dealt TO the band by the opposing creature, distributing it among the band's members however they choose (CR 702.22f). This lets you protect a valuable creature by soaking its damage with a cheap one.

For example: you attack with Benalish Hero (1/1 with banding) and a Serra Angel (4/4) banded together. Your opponent blocks with a 5/5. Normally the opponent would assign 5 damage to Serra Angel, but because of banding, you assign that 5 damage — you put all 5 on Benalish Hero, and Serra Angel takes none. Serra Angel survives.

Note that banding only grants damage assignment control over damage dealt TO the band; damage dealt BY the banded creatures to the opponent's creature is still assigned normally by each creature's controller (CR 702.22f).