My understanding is that it is simply a closed bid system where three separate banks submit bids (interest rate that will pay on sums invested with them) with the highest one winning.

In general, you want to buy something. You have to get a quote from at least three vendors, then you pick the lowest. For contracts, like to build something, paint city hall, whatever, you solicit bids by publishing a notice in the local paper. Usually the bids are sealed, which "guarantees" people make a fair bid without undercutting their competitor by a dollar.