bluewater is right on the mark. Don't get it too complex. You can either follow the Tanzer diagram, since you already have two banks, or you can do a bw suggests, and just run one for start (only) and the other bank for house (only) like the big diesel aux setups do.
"Can you please help me understand what the emergency diode override does?"
Ah, another one of those complexities of a 2-bank setup. The diodes are there to keep the bilge pump circuit (which is wired to both battery busses) from making connection between both battery banks. They isolate the battery banks. Otherwise, the bilge pump circuit would act like having the switch in "both" all the time.
Likewise, this arrangement allows you to charge either bank (but not both banks) from the alternator. You set the "override" switch to the dead battery, and it bypasses the diode for that bank, charging that bank. Clunky system, as it requires so much manual intervention, and you could accidentally leave the switch in the wrong position. The echo charger is a much more sophisticated setup, and does not require the override switch. You can feed the echo charger from the alternator, and it will divvy up the output for each bank.
"Also, is there any downside to using a small residential breaker box instead of an AC panel? I am constrained by cut-out space where my DC panel resides."
The residential box is likely painted steel, so it will rust pretty fast. The Ancor 553004 (see Electrical Control Panels | Marinco
) accommodates the breakers you need, and is quite small (4-1/2 x 5-3/8"). It's cheaper, it's non-corroding plastic, and that's why I chose it. It also uses standard, marine-rated breakers, rather than non-ABYC stab-connection residential units, which would tend to become unreliable in the marine environment.
FWIW, I located my AC panel in a different spot from the DC panel, so there would no confusion. Consider that the "old" standard for DC negative ground was Black (the "new" standard is yellow, but most older boats aren't wired to that standard). AC hot is ALSO black. Wouldn't ever want those two accidentally tied together!
"My DC panel, the three terminal strips attached to it and the back of my battery switch are all uncovered. I assume this violates standards and I can see how it could be a safety hazard since these wires are exposed in my port lazarette, where things are stowed and removed frequently while under sail."
I built a lightweight, 1/4" plywood cover, and finished in west epoxy (with white pigment). Cheap, light, waterproof, complies with ABYC.
HTH (hope this helps)