That sounds very strange indeed. Unless things are different in ID, this does not sound right.

In most cases (and in most states), the agent is simply required to pass along all bids. After all - he is NOT the seller - the bank and the seller are. The sellers agent is just an intermediary.

Just because they "have a higher bid" doesn't mean it's a "good bid". The "higher bid" could be an FHA loan with 3.5% down - and your "lower bid" could be an all-cash offer.

We are to submit all offers to our sellers.

When banks are the sellers, they may have different rules; they do for everything else.
The bank could have told their agent that they did not want any bids lower than X amount. They will do that.
Not common practice in regular transactions. Banks are not regular transactions; ever.

It's always been drilled into me to "submit all offers" if the listing agent is not submitting your offer to the seller the only reasoning I see is that they have an agreement to not have other offers submitted lower than the one currently on the table...I'm not in the situation so I don't know what's going on with the listing agent or the seller so I can only speak in theory..even lower priced offers may be better than higher ones if there are contingencies attached to the higher bid, and just for me (I'm not speaking for the other agent or the seller) it would make sense to have submitted offers and let the other buyer (ie., in theory, you) know that they are in second position and that if something happens to the first offer then they (you) would be next up...to refuse offers seems to be shooting yourself in the foot...but again I'm speaking in theory...sorry cannot be more specific...can your agent speak to the listing agent and see if they are willing to at least put you in second position?